7 Responses

This video is so wrong on so many levels it’s hard to know where to begin.

It is essentially advocating the end of fractional reserve banking. But eliminating the ability of banks to transform short-term savings into long-term loans would trigger a collapse in the supply of credit to the economy. That, in turn, would lead to a collapse in economic activity and — by implication — in tax revenues.

This video also massively misunderstands the sources of our current fiscal woes. The reason we have a big deficit is not because we pumped lots of cash into the banks — the capital injections, while large, were manageable. The main cause of the deficit is the sudden decline in economic activity caused by the financial crisis. This is not something bank reform can fix — new rules can only make future crises less likely.

But the real problem highlighted by this video is the deep public misunderstanding of the role that banks play in the economy — which leads to the simplistic assumption that fixing banks can somehow rescue the whole economy.

I make no pretence that this is the only answer. I see no ‘only answers’

I do see taxing the benefit banks get from creating their free product which is capable of production without limit at no cost and therefore not subject to the normal rules of economics since credit is not a scarce resource as being of enormous benefit

No fixing banks won;t change everything

But putting them and bankers and back in their place is a pre-requisite for getting the economy right – and I doubt you can deny that

I agree that the deficit is not directly the result of bank bail-outs (this is NOT what the video suggests, by the way). You are right to point out that it is the result of a global recession caused by a global financial crisis, but then you seem to absolve the banks from responsibility for this crisis.

The video is simplifying for the sake of clarity, but it is essentially correct. Banks do not lend enough for investment in small businesses or the community, because they have a much more profitable plan: They inflate short-term asset price bubbles (especially property) in order to inflate their balance sheets, so that bankers can collect huge bonuses until the bubble goes pop and the losers get bailed out by government (the bankers’ welfare safety net).

It is also correct to point out that banks do have a license to create money out of nothing and that this is ultimately the source of much of their profits. (It doesn’t matter that technically this process is the limit of an infinte geometric progression – the result is the same). Banking is therefore not an ‘industry’ in the traditional sense, since its main product is debt (>90% thin air, <10% reserves), with the other product being gambling (or ‘insurance’ if you’re being naive).

I’m not entirely sure what the solution to these problems is, either, but banking does need fixing, as it underpins the money supply – it IS the money supply. It is necessary to simplify when trying to explain these things to the public, as I tried to do on my own blog here:

The interest paid on these debts has gone where? and when the loan turns bad who picks up the tab? What exactly will prevent this dynamic in the future?

If we had no recourse mortgage loan finance as in the US, the correction would have been very swift. I reckon the US will recover much more quickly than UK, because of its size relative to banks.

Perhaps unlimited liability banks for all top execs in the recent past and the present. Don’t understand why banks/mutuals cant borrow short and lend long prudently from long term real savings, maybe that just doesn’t generate enough reward?

Without money growth ‘capital gains’ in housing we could be more like Germany with cheaper and better quality rented accomodation and also less exposed to banking induced deflationary debt busts.

Perhaps the bankers understand it better and should therefore can be trusted,but that seems to have been tested to destruction. Regulation has not worked either. Its unfortunate that our rulers seem not to show any understanding, particularly if it helps them in their ‘struggles’ to stay in power.

The money supply should stay ultimately in state control, lets see how China handles its banks (no doubt they have a few). Crucially banks need to be much smaller than the state backing them and its fiscal position. You can bet they are watching and learning, hopefully, and the Chinese may break the stranglehold of the Big 4 fairly soon.

@Chris Whitrow: “..Banks.. have a much more profitable plan: They inflate short-term asset price bubbles (especially property) in order to inflate their balance sheets..”

They can only do this because the rental value of land is not collected by the state. You can’t make any more land so its price can only go one way if demand is inflated by banks. Banks are collecting a big share of rent via interest, mostly on residential property, this being 90% of the value of all landed property and a majority share of national wealth. If the totally unearned rent were extracted by a full land value tax there would be no property boom/bust cycle and the banks would not be earning their windfall profits. Remember before deregulation most mortgages were obtained from building societies and local authorities and banks generally only granted home loans to their employees on attractive terms.

We are indeed advocating the end of fractional reserve banking (I do realise that this term is not completely accurate in describing our financial system). Our proposals, however, would not prevent short term deposits being used to make long term loans. Please see the solutions section of the Positive Money website http://www.positivemoney.org.uk and have a look at the paper we authored with NEF and Richard Werner and submitted to the independent banking commission.

Through decoupling the issuance of new debt with the issuance of new money, and issuing this new money publicly, debt free, we can add a considerable amount to the exchequer by preventing the inflationary effects that bank created money has, and taking this “private taxation” back into the public domain. This, the naturally falling levels of debt, the reduction in the occurrence of asset bubbles, and the prevention of future debt crises is how the deficit will be tackled.

Re Maturity Transformation (transforming short term deposits into long term loans), this will still occur through individuals pooling their money to be invested through the vehicle of a bank “investment pool”, used to make loans. Loan repayments return to the investment pool and are then used to make further loans, the bank customers who invest money will give it to the banks to be put into the pool for a period of time, and the market will dictate the size of the national investment pool and the rate of interest paid to customers.